Posts Tagged ‘South America’

Yesterday I wrote about Paraguay and its piano and why investors should beware this dubious country planning to make its first public international bond issue ($500 million). Today I see that the deal is almost done and dusted. I also see that Barclays are the only ones to issue a word of caution.

I wonder why this has been rushed out only three months before a new government is elected in Paraguay, all the more since the country has a long history of one government repudiating the debts of a previous one.

I was forwarded a list of questions raised by an investor I know who invests his own money (and not earning management fees from handling other people’s). Having seen the preliminary prospectus, he had these questions for the Paraguayan Minister of Finance and Citibank (lead manager of the bond issue):

1 – Why were investors not told that Paraguay has for years kept its funds safe at the Bank for International Settlements (BIS) in Basle because it is immune from legal attachment from creditors (not vulture funds in the case of Paraguay)?

2 – Why were investors not told that Paraguay will continue to keep its money protected at the BIS and therefore, in the event of the new government reneging on payments for the bond, a judgment against it will be worthless for enforcement purposes?

3 – Although the prospectus did mention a list of problem creditors, why did it not state clearly that they all refer to undertakings by one government repudiated by another?

5 – Why were investors not told what it costs Paraguay to keep its money protected at the BIS?

6 – What difference would it make to the economy of Paraguay if the bond issue was delayed until after the elections in April and proceeded with the backing of the new government which should be in power for five years? After all the current government is temporary, its mandate dubious and not widely recognized until the elections in April.

So into whose pocket did the extra $90,000 go? That is hard to say, as it was in the case of $85 million which a Paraguayan entity borrowed from a consortium of banks in Switzerland in the mid-1980s, providing a government guarantee and written ministerial undertakings. None of that money was ever spent on the infrastructure projects for which it was raised. It disappeared.

A new Paraguayan government subsequently repudiated that debt and continues to refuse to repay it despite exhausting all legal channels of appeal following a Swiss Supreme Court judgment against it. The country has a history of one government reneging on the financial undertakings of a previous one. There are further claims of about $100 million in the pipeline in this category.

None of this would be of much concern for the rest of the financial world, if Paraguay were not just now planning to float its first public international bond issue in living memory. In the next few weeks, just before elections for a new government, it says it will raise $500 million in an operation managed by a U.S. bank to invest in infrastructure projects.

Paraguay will doubtless give a full account of all outstanding claims against it in the prospectus, and investors will no doubt give it a fair reading. They may also recall the old adage caveat emptor.